Wednesday, 27 February 2008

Macro-Level Trends – US Fiscal Policy – Where Next for US Automakers?

In contrast to what seems a relatively healthy picture for European automakers - see last post - the recent reporting of very bearish US econometric indicators have made for an anxious atmosphere questioning “what now?” throughout US industry, its financial structures and of course global observers that were keen to see an early resolution negating a lengthening the US recession.

Obviously key issues are:

1. Interest Rate Policy
2. Unemployment Rates
3. Housing Market/Pricing Dynamics
4. Consumer Sentiment Trends
5. Productivity Measures

Interest Rates -
The Federal Reserve’s previous heavy interest rate cut has not had the immediate effect hoped for upon many of the intended ‘shadows’; the continuation the financial market’s fragility the most visible. It will possibly provide a small effect against inflation growth (yet to really be seen given the lag) and continued the US $ slide. But of course economic policy outcomes aren’t achieved overnight. Given recent Fed statements, policy analysts expect Bernanke to continue in the same vein believing that it is the most powerful and visible macro-economic lever to combat the negativity within industrial investment and housing purchase sentiment. As a consequence, the weakened dollar will theoretically also attract foreign inward investment and raise the attraction of US exports.

Unemployment Trends -
Whilst the theory is sound, senior industrialists also recognise that whilst Bernanke can set the context, they must create the internal operational conditions for survivability and growth. And management theory suggests that the near term will require organisational restructuring to reduce higher cost overhead and variables; since little can be done to reduce increasingly costly input costs (energy, raw materials etc) much of that cost-saving will be workforce related, now more available since the UAW contract agreements. And as with notional academic fiscal theory: “when interest rates drop, unemployment rises”. This increase in unemployment and knock-on effect in consumer confidence (adding to housing concerns) will obviously affect auto-sales.

Housing Market Dynamics -
Given that the foundation of American growth over the last decade has been high domestic consumer demand created through loose credit, itself based on a burgeoning housing asset class, it is not surprising that Wall St, The City and other major financial centres and bourses have kept a close eye on US housing data. So the S&P/Case-Shiller Home Price Index was jumped upon when it released its Dec ’07 figures. Measuring the prime 20 metro areas in the country, results demonstrated a bleak picture, December showing a 9.1% YoY drop, extending the rate of decline beyond the 7.7% November YoY figure.
Nationwide (beyond the prime 20 regions) the drop still stands at a heavy 8.9%, the worst decline in 20 years. Forecasters such as Global Insight expect that rate to continue downward through 2008 given the macro-pressures, a Bloomberg survey revealing an expected 9.7% drop.

This 12th quarter period decline was well pre-empted by a slow-down in the house-building sector a long-while ago, many real estate developers having to operate at skeleton levels, hold their breath, and (as with Kimball Hill Inc) look at the possibility of filing for Chapter 11. Undoubtedly there’ll be house-builder consolidation take place and this may be the time for automakers to start talking to national and regional home-builders about new inter-related home and auto purchase financing schemes and alternative business models? (see 03.01.08 post – “Remodelling the Structural Economics of Autos & Housing”)

Consumer Confidence –
Needless to say from the ‘feeling on the street’ things have (over the last 6 months especially) deteriorated. Officially recognised records highlight a 5 year low in sentiment as illustrated by New York’s Consumer Confidence Board, their survey showing a 75 point in their index, a rapid decline from January’s 87.3, and well below forecast. The usual real-world sentiment headwinds are to blame – energy prices & food prices especially - even if official RPI price inflation statistics conveniently exclude these 2 important effectors. The social psychographic is perhaps most evident with household improvement spending, the housing-retail interlink strained heavily, as seen by Home Depot EoY results, the Q407 portion most effected.

Productivity –
Prices and Core Inflation have been the major stories here, whilst measures saw a 1% rise in general productivity, input prices saw a rise of 7.1%, the highest in 27 years, since the 1981 recession. Given that context, greatest concerns are over a mini (or perhaps not so mini) stagflationary effect where static/minimal growth is heavily outpaced by price inflation. This in turn generates worries about demand for consumer equalising wage costs rises and so an ongoing inflationary spiral. Of course combating such a picture is a central part of the Monetarist Theory preferred by the US, UK et al, so there will be governmental persuasion to maintain operational price controls where possible, and that means labour costs (see above).

So what does this all mean for Autos?

Industry watchers will recognise that it means an onward march of productivity and revenue improvement to effectively tread-water, in the short-mid term at least. Corporate revival plans for Detroit’s Big 3 may need slight retuning, though for the most part, this possible recession had been factored-in plans, the US economic pull-out predicted for 2010, so long-term strategies accordant with that scenario.

However, it will mean another round of efficiencies seeking from production plants, work-force, suppliers etc that could well see a push for higher volume runs of standardised specification vehicles, the ‘simplicity’ of which could be sold-on to aid what was once a dizzying array of consumer choice.

Infact, GM, Ford and Chrysler should now be researching what constitutes best-fit specification models for their production order relative to the near-term US marketplace, so much will be demanded of the current and future vehicle line product planners to be sure they can maximise production and sales efficiency. That’s not to say that they end up with the ‘Black Model T’ scenario, simply that dealers could be asked to encourage certain consumer choices that will in time stand them in good stead for re-sale. Hence managing the internal value-chain to reduce ‘fringe’ product will be key.

Interestingly, given the housing woes, there have been reports of trends and issues that could provide a housing-related hiatus for Autos, in what seem bleak times.

Firstly, it has been reported that whilst (especially recent) homebuyers have let their mortgage repayments slip, they have maintained the willingness/ability to spend on Autos, leisure and disposable goods – unwilling to give up the consumer dream even if their own homes are foreclosed. The consumer psychology maybe that whilst the perfect ‘own home’ dream may be distant, that the ‘enjoy now – pay later’ attitude has not declined, infact given the lack of the ‘big-dream’ (house) that this disappointment may be offset with jewellery, consumer goods, holidays etc…to make life worthwhile.

Secondly, there may be an increasing prevalence that foreclosures don’t happen as quickly, if in some circumstances, at all.
There is a precedent being set that homeowners facing foreclosure can demand proof that a foreclosure notice is accompanied by the relative home-loan note. Since these notes were sold on and on and on to 3rd, 4th, 5th parties within the complex SIV & CDO financial instruments that created the ‘credit-crunch’, their exact whereabouts and actual proprietary ownerships have become hard to locate, the record keeping behind the deal-making seriously lacking. Thus, there will undoubtedly follow a trend by those facing repossession to utilise this technical loop-hole in delaying or quashing foreclosure; assisting security and spending confidence

Both of these trends may, if actually more prevalent than suspected, help ease the imagined clamp-down in auto-sales expected from the ever worsening official metrics. Whilst not to any extend a panacea, similar ‘invisible’ trends and issues must be identified and presented to demonstrate that the auto-market may not succumb to an apparent ‘melt-down’ below 15.0m units